COVID-19 in Nigeria- Some Legal Considerations relating to Contracts

The outbreak of the novel Coronavirus (COVID-19), first reported in Wuhan, China in 2019 has negatively affected the world economy including Nigeria’s economy.

The crisis caused by COVID-19 has interrupted the production, supply, distribution and commercialization of products and services worldwide, due to government restrictions put in place to contain the spread of the virus.

The impact of the outbreak on industries and business sectors in Nigeria and globally is wide and far-reaching. The outbreak has affected companies that depend on importing goods and services and raw materials from China and other countries heavily affected by COVID-19. The outbreak has also resulted in significant disruptions in the banking and finance sector with banks restricting their operations; the cancellation and/or postponement of major sporting events such as the Olympics which in turn is affecting the betting/gambling industry; the cancellation and/or postponement of concerts, award shows, movie premieres, the shut-down of parks and entertainment centres which in turn has affected ticketing; the cancellation of air-flights and border closure which is affecting the airline, hotel(including Airbnb) and tourism sector. Restaurants and the food industry/agriculture sector as well as, the healthcare and education sector, are also affected.

The outbreak has the potential to significantly impact commercial contracts by resulting in non-performance, suspension of performance, termination, the frustration of contracts and damages for breach of contract due to delays in deadlines or even interruptions in the development of projects executed by these companies or provision of services in Nigeria. We have seen airlines suspending their operations and seeking to refund fees paid, logistics and supply and entertainment industries companies suspending performance and so forth.

With the spread of COVID-19, it is necessary to take into account that the Nigerian legal system recognises that parties to a contract can relieve liabilities caused by non-performance or breach of contract when the said breach is the result of unforeseen events caused by the COVID-19.

Force majeure

One of such reliefs that parties can include in their contract is the force majeure clause.

What is a force majeure clause?

A force majeure event is an unforeseeable circumstance such as acts of God, labour strikes, political risks, diseases, fires, earthquakes, natural disasters, an outbreak of diseases, epidemics, pandemics or a more general category of events beyond the reasonable control of a party which affects the capacity of a contracting party or parties to fulfil their contractual obligations.

Must be contractual…

In Nigeria, force majeure is strictly contractual. In that, parties cannot take advantage of ‘force majeure’ unless it is expressly contained in a contract.

Effect of force majeure clause…

Force majeure clauses may expressly excuse a party from performance of its contractual obligations or temporarily suspend or extend the time for performance of a party’s obligations, or an adjustment of the contract price, restitution of money paid and compensation for work or services already performed.

Defined events….

Whether or not the outbreak of COVID-19 constitutes a force majeure under a particular contract will depend on the specific wording of that contract, and the governing law in the jurisdiction applicable to the contract.

A force majeure clause may explicitly provide for ‘epidemic’ or ‘pandemic’. This is particularly relevant given that on March 11, 2020, the World Health Organisation declared COVID-19 a pandemic.

Even if the clause fails to include a ‘pandemic’ or epidemic’, government regulations and directives such as border restrictions that limit international transportation of persons, goods and raw materials, quarantines that reduce the labour force available to companies, social isolation, social distancing and outright lockdown that reduces the mobility of Nigerians could be construed as ‘acts of government’.

Businesses affected by COVID-19 should examine the defined events in its force majeure clause and determine whether or not COVID-19 falls within one or other of those events.

However, to qualify as a force majeure event, pandemic or epidemic or acts of government must be expressly included in the force majeure clause particularly if other events or acts are listed so as not to be caught by the ejusdem generis rule of interpretation.

Impossibility of performance…

To successfully invoke a force majeure clause, the performance of the contract must be impossible. It is not enough that performance may have become inconvenient or too costly it must be impossible. Each case will be assessed to determine whether the breach of contract or delay is indeed the result of an event that constitutes force majeure.

To trigger the clause, the onus will rest on you to prove that COVID-19 has rendered your contract impossible to complete. Until you can establish this, an attempt to trigger the clause could have other unfortunate consequences under the contract including in certain circumstances amounting to a repudiation.

For example, Shell and Total rejected a force majeure notice declared by China National Offshore Oil Corporation on liquefied natural gas contracts that would have freed CNOOC from its contractual obligations to take delivery of shipments.

Notice of force majeure…

To rely on your force majeure clause, carefully examine your contract to determine what the relevant notice provisions are to trigger the clause.

A notice provision imposes an obligation on the party seeking to rely on the force majeure clause to provide notice to the other party to the contract.

Such notice provisions typically contain strict timelines within which notice must be provided, and often require that notice be provided in writing. Failure to comply with the notice provisions, its timelines, or its requirement of the form (i.e. in writing or other forms) may result in severe consequences.

International application…

Your ability to invoke the clause is of course not restricted to events in Nigeria. If one of the contracting parties is from another country and that country is affected with a consequential impact on your ability to fulfil a contract you may be able to invoke the clause.

For example, the China Council for the Protection of International Trade announced on January 30, 2020, that it would issue ‘force majeure certificates’ where Chinese entities were contracted to foreign entities. As at March, the Council had issued 4,811 force majeure certificates.

The question this raises is whether the Nigerian courts will recognise these certificates in the absence of a force majeure clause in the contract.

Mitigation…

Before attempting to trigger the clause, you should carefully consider all the options available for completing the contract including any possible alternatives to mitigate the fallout. This may involve considering whether the entire contract is affected or whether there are parts of the contract that you can still complete.

Frustration

In agreements that do not contain a force majeure clause or if the outbreak of COVID-19 does not constitute a force majeure under a particular contract, then parties may rely on the doctrine of frustration.

Frustration typically occurs if performance has become impossible due to no fault of the non-performing party and as a result of an unavoidable and unforeseen event for which the parties have made no provision in the contract.

However, the contract will only be frustrated if the relevant event is so fundamental as to affect the very basis of the contract and the contract did not provide for one of the parties to bear the consequences.

When a contract has been frustrated, the contract is brought to an end, in that both parties will be released from any further performance of the contract.

Thus, Nigerian businesses can argue that COVID-19 is a supervening event, thus rendering them incapable of fulfilling their obligations under the contract.

Whether a contract a frustrated will be determined by the facts of the case.

This will depend on the nature of the services to be provided under the contract and the severity of the impact that the outbreak has on a party’s ability to perform its obligations under the contract.

Unless the contract has been frustrated, obligations under the contract will continue even if performance might have become more burdensome to one or others of the contracting parties.

Material Adverse Clause

Certain contracts such as loan agreement, merger and acquisition, project finance and other corporate finance transaction contain a material adverse event clause. This clause enables a party to take certain steps once any event, circumstance, change or effect that is materially adverse to the business occurs.

COVID-19 has certainly had a significant impact on several businesses. This may result in investors pulling out of businesses, borrowers defaulting on their loans and projects taking more time than projected as a result of material adverse change in the circumstances caused by the outbreak.

However, an adverse change is material only if it significantly affects a borrower’s ability to perform its obligations under the contract and must not be temporary.

Thus, to rely on the clause, parties will be faced with determining whether COVID-19 will have a material adverse effect on the performance of the contract.

The way forward

Thus, the question of whether or not the Coronavirus may trigger a force majeure clause in a particular contract or give a party the right to withhold performance due to supervening impossibility will require a detailed analysis of both the contract, applicable laws and the facts and circumstances of the particular case.

Businesses should re-negotiate their commercial arrangements to help develop strategies to mitigate business disruptions. When negotiating new transactions, the impact of a global pandemic such as Coronavirus should also be carefully considered to ascertain whether it may somehow, in the context, amount to a force majeure event or may have ‘a material adverse effect’ on a transaction or the implementation of a transaction such as an M & A, property development or supply chain.

It is necessary to take into consideration that these legal defences can only be used if companies fail to comply with their contracts or are delayed in the development of their projects as a result of the global crisis generated by the outbreak of COVID-19 or restrictions ordered by the government.

Some factors to consider

Has the outbreak of COVID-19-

• Prevented, delayed or adversely impacted the performance of a contract;

• Resulted in increased costs for the performance of a contract;

• Created the potential for breach of contract and, if so, what are the consequences of a breach under the contract;

• Resulted in the performance of the contract becoming a thing radically different from that which was undertaken by the contract;

• Rendered impossible the performance of one or several obligations under the contract.

If yes, does the contract contain-

• A force majeure clause which provides for relief or suspension of contractual performance and if so, are there notice requirements and timelines?

If the contract contains a force majeure clause-

• Will the declaration of a force majeure have an impact on a party’s agreements or disclosure obligations under the agreement?

If no, has the contract been frustrated-

• Has performance under the contract become impossible as a result of the coronavirus outbreak?